Increasing commodity prices causing some concern

• The U.S. Department of Agriculture recently forecast the consumer-price index for food will rise between 0.5 percent and 1.5 percent this year and between 2 percent to 3 percent for 2011.
• Adverse weather, a weaker U.S. dollar, increased exports, higher crude-oil prices and heavy commodity contract buying by speculative investor funds have contributed to increasing commodity prices.

Although the recent surge in agricultural commodity prices has caused some concern about a potential increase in food costs, an overall increase likely will be “modest,” according to economists with the Texas AgriLife Extension Service.

“Commodity prices reached record or near-record highs in 2008, but weakened in 2009 and most of 2010,” said Jose G. Pena, AgriLife Extension economist-management at the Texas AgriLife Research and Extension Center in Uvalde. “Food prices increased in 2008 just as the U.S. was entering into what many economists describe as the worst recession since the Great Depression.”

Pena and other AgriLife Extension economists recently assessed the effect rising farm commodity prices might have on retail food prices and whether those increases would result in increases similar to those experienced in and beyond 2008.

“Farm commodity prices fell sharply in 2009 and 2010 after reaching record levels in 2008,” Pena said. “However, food prices continued to rise in 2009 and 2010 even as farm commodity prices returned to 2007 levels.”

Pena said the U.S. Department of Agriculture recently forecast the consumer-price index for food will rise between 0.5 percent and 1.5 percent this year and between 2 percent to 3 percent for 2011.

“From 1990 to 2006 the average annual food price increase was 4 percent and the increase in 2010 will be the smallest since 1992,” he said. “While prices for basic commodities like corn and wheat are higher than they were in 2007, they remain well below the record highs of 2008.”

“Although the agricultural producer is sometimes vilified because of the increasing price of agricultural commodities, the lion’s share of that increase is due to factors beyond the producer’s control,” he said. “USDA data shows farmers get less than 20 cents of every dollar spent on food. So the majority of the increase comes from the elevation of production and post-production costs, including the costs of energy, labor, advertising, packaging and transportation.”

He added, however, that producers do receive a higher percentage for foods consumed closer to their raw form, such as fresh fruits and vegetables, as opposed to processed food items, such as baked goods and cereal products.

“Still, on average, a 50-percent increase in the price received by the farmer results in only a 10-percent percent increase in the retail cost of food,” Pena said. “The recent upward movement in commodities pricing is expected to have little immediate effect on the prices of basic food items.”

Modest price increases

‘He said consumers should expect to see a modest price increase in meat, poultry and dairy products in 2011, as well as an increase in grain prices due to temporarily tighter grain supplies.

“We’re seeing commodity price increases across the board, but are looking at a situation relating to U.S. stocks of wheat, corn and soybeans,” said Mark Welch, an AgriLife Extension economist at Texas A&M University in College Station who specializes in grain marketing.

Welch said quantities of these grain commodities were all reduced in the recent Supply and Demand Estimates released by the USDA.

“We already expected a further reduction in the estimate of the U.S. corn supply, but the cut in the soybean estimate was a surprise,” he said.

He said, however, that the worldwide supply of these grains is in good shape with carry-over stocks above their 20-year average, but there is a “pipeline” problem affecting their short-term supply in the U.S.

“The reduction in U.S. corn and soybean supplies can be offset by production in and exportation from other countries, but there is some concern about whether there will be adequate stocks to comfortably carry the U.S. consumer over until we get more,” he said. “With lower grain production, as the supply tightens the prices will increase — certainly at least in the short-term.

“There also was a small reduction in the wheat estimate, but that may be offset by increased production in Argentina, Australia and elsewhere. Plus, we’ll need to wait and see what happens with the upcoming Russian wheat harvest.”

There also has been a reduction in another significant agricultural commodity, beef cattle, said David Anderson, AgriLife Extension livestock economist. Anderson said cattle numbers will be fewer over the next decade, but the price of corn will dictate the level and spread in calf prices.

"I think we will continue seeing beef production and cattle numbers drop off in the next couple of years," he said. "We are forecast to produce 25.4 billion pounds of beef in 2011 versus 25.9 billion pounds in 2010. That will lead to increases in price, but it also depends on corn prices and (their effect on) calf prices."

Anderson said the first quarter of 2010 resulted in the least amount of beef supplies since 1997, after factoring out exports, and he expects that during each quarter through 2012 the beef supply will continue to decline.

“Overall, beef demand has been hurt by the recession, but has been strong due to consumers ‘trading down’ to stretch their income,” he said. “That's led to more grinding of specific cuts of beef — chucks and rounds — to take advantage of the hamburger demand.”

He added, however, that cull cattle have also been fetching premium prices as a result of the demand for ground beef, and that export markets also continue to grow and show strength, with Vietnam emerging as a top customer for U.S. beef exports, in 2009.

"What I'm suggesting is that booming exports tighten domestic beef supplies even more and should lead to higher cattle prices for the next couple of years," Anderson said. "Supplies keep cutting back because we're not making enough money to build herds back."

Generally, however, the economists agreed that in spite of the commodity increases and the possibility of slightly higher food prices in the future, American consumers can still expect to have adequate supplies of the best and safest food in the world at the lowest overall cost.